All the Devils Are Here [111]
And yet, Falcon wound up keeping his job. In part, Brickell said a few too many impolitic things during his confirmation hearings later that year. But more than that, the political winds were shifting. Whereas it had once been in the administration’s interest to play nice with Fannie and Freddie, it was suddenly in the administration’s political interest to show it could get tough on the GSEs. Although there was no love lost between Falcon and the Bush administration, the White House realized that his doggedness—and, for that matter, his anger—could be useful. When Brickell withdrew his nomination, the White House decided to stick with Falcon. The war between the GSEs and the White House was on.
It was the Enron scandal that caused the political winds to change. The Enron scandal spooked the White House; Bush had been friends with Enron CEO Ken Lay and had even bestowed on Lay one of his famous nicknames—“Kenny Boy.” When the administration looked around in the wake of the Enron debacle to see what other potential business scandal might hurt it, it was hard to miss Fannie and Freddie.
The Enron scandal had another, more practical consequence: it caused Freddie Mac to hire a new accounting firm. Freddie’s longtime firm, Arthur Andersen, had been forced out of business after being indicted for its role in the Enron debacle. In the fear-ridden business environment of 2002, Freddie’s new accountants at PricewaterhouseCoopers scrubbed Freddie’s books and found them seriously wanting. It forced Freddie Mac to restate its earnings going back years. In January 2003, around the same time OFHEO was sending around its report on systemic risk, Freddie Mac announced that it would be restating its earnings “materially” for at least the past two years. The restatement, when it was unveiled six months later, was a stunner: since 2000, Freddie had understated its earnings by some $5 billion. (The purpose of the understatement had been to produce smooth earnings growth.) Freddie’s entire senior management team had to step down.
Fannie responded to Freddie’s problems with astonishing—yet unsurprising—self-righteousness. Raines publicly accused Freddie of causing “collateral damage.” The frequently asked questions section on Fannie’s Web site included the following statement: “Fannie Mae’s reported financial results follow Generally Accepted Accounting Principles to the letter.... There should be no question about our accounting.”
The Freddie restatement was yet another humiliation for Falcon. Not long before Freddie revealed that it would have to restate its earnings, Falcon had publicly pronounced the company’s internal controls “accurate and reliable.” Furious at having been so wrong about Freddie Mac, Falcon decided to launch an investigation to see if Fannie had the same problems. OFHEO hired Deloitte & Touche, the big accounting firm, to dig into Fannie’s books.
The White House piled on, yanking Bush’s presidential appointees from the GSEs’ boards. Then, in the fall of 2003, it put its weight behind a bill to toughen regulation of the GSEs—a bill that Fannie’s lobbyists managed to water down, causing the White House to pull its support. (The bill failed.) Around the same time, John Snow, the new Treasury secretary, even called for a receivership provision should Fannie or Freddie become insolvent. Amazingly, there was no real procedure in place for reorganizing the GSEs in the event of a bankruptcy. The larger implications were clear: the government was signaling that it would not stand behind Fannie and Freddie’s debt.
Some White House aides began to jokingly call the campaign against the GSEs “Operation Noriega,” after the strategy the United States used to roust former Panamanian strongman Manuel Noriega. (It bombarded him with loud rock music.) The administration helped spur anti-Fannie and anti-Freddie op-ed columns and editorials. It also got HUD in the act,